Tag Archives: Fed balance sheet

SEMI-MONTHLY FISCAL/MONETARY UPDATE – SLUGGISH GDP, FED NORMALIZATION BEHIND SCHEDULE, GOLD THREATENS AN UPSIDE BREAKOUT

Download PDF

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GDP GROWTH SLUGGISH, FED BALANCE SHEET COMES DOWN-BUT BEHIND SCHEDULE, GOLD PRICE READY FOR UPSIDE BREAKOUT?

THE ECONOMY

It now seems clear that Q1’18 will not demonstrate a pickup in the economy. After 2.9% real GDP growth in Q4’17, lagging the much heralded 3% plus in Q2 and Q3’17 (Q3 aided by reconstruction activities after the storms), it now seems clear that Q1’18 will be closer to 2% than 3%. Recall that Q4 consumer spending, which included the best Christmas season in at least five years, included record high consumer credit card debt (with an increasing incidence of default) and a reduction of the consumer savings rate down to about 3% of household income, not the healthiest combination for longer term spending expectations. Sure enough, the first quarter of ’18 seems to be characterized by slightly higher consumer savings, as the public is still burdened with high health care, rent, and education costs. We saw a chart recently that indicates that about 33% of 25-29 year olds are living with parents or grandparents, up from about 26% in 2010. No doubt many of these Millennials are coping with the burden of student loans. Surveys indicate that many consumers are going to apply savings from the new tax bill against debts, rather than increase spending. Economic spokespersons (i.e.Kudlow, Mnuchin, etc.etc.) continue to predict that the tax bill will stimulate faster GDP growth and much higher tax revenues, in time reducing the federal debt burden. Time will tell, obviously, but the jury is still out, and the signs are not convincing so far.

FEDERAL RESERVE NORMALIZATION PROGRAM

The US Federal Reserve continues to “normalize” the bloated balance sheet, but is running behind schedule. Recall that the plan called for $10B/month reduction in Q4, $20B/month in Q1, $30B/month in Q2, $40B in Q3, $50B in Q4’18, and that’s as far as described. The plan fell behind schedule by $23B in Q4, fell another $4-10B behind plan in Q1 (depending on whether you use 3/28 or 4/4), so was $27-33B behind schedule as of 3/31, a significant percentage against the $90B that was scheduled. In the first week of Q2, ending 4/11, the Fed’s balance sheet was essentially unchanged. The rubber meets the road now with a reduction of  $30B monthly. Since the Fed’s activities affect short term interest rates rather than longer term, it could be instructive to look at what the bellwether ten year treasury note has done over the last six months. During Q4, as the Fed got $23B behind their $30B objective, the ten year traded between at 2.35% to 2.45%. The Fed stepped up their selling in Q1, meeting their quarterly objective (though not catching  up) and the ten year moved dramatically, from just above 2.40% to as high as 2.95% and closed Q1 at about 2.75%. So far in Q2, the ten year has traded back up to 2.85% as this is written.  The more volatile two year treasury, which bottomed around 1.3% in midSeptember, has moved in a straight line to 1.9% at 12/31, 2.27% at 3/31, and 2.38% today. These are very dramatic moves, and the pace of “normalization” continues to quicken. Time will tell what affect $30B/month of Fed “runoff” has on interest rates, but the possibility exists that rates could spike higher, especially if the Fed tries to catch up with the shortfall to date of about $30B. If interest rates spike upward in Q2, as they did in Q1, it could  be unsettling to capital markets that are already showing volatility that we have not seen in years

GOLD UPDATE

Gold has been “consolidating”, around $1350/oz., up 3-4% for the year, fairly firm day to day, seemingly threatening to break out on the upside. No doubt the increasing visibility of federal debt accelerating to over $1 trillion annually as far as the eye can see, is contributing to the interest, as well as the possibility of increased inflation. Since Central Banks, worldwide, are trying to stimulate inflation, it stands to reason that they would be continuing to purchase gold bullion, which they are. Market technicians, chartists, point to $1,375 and $1,400 per ounce as “breakout” levels on the upside. After a 4-5 year consolidation, some observers think gold bullion could make a move to new all time highs, above $2,000/oz. From our standpoint, the gold miners seem to be the most advantageous way to participate, since the gold mining stocks are even more depressed in price than the metal itself. The last time gold bullion was around $1,350/oz., in mid 2016, the gold mining stocks were about 35% higher. If the price of gold breaks out on the upside, the gold mining stocks should do even better.

Roger Lipton

Download PDF

SEMI-MONTHLY FISCAL/MONETARY UPDATE- EVERYTHING’S UNDER CONTROL……SURE!

Download PDF

SEMI-MONTHLY FISCAL/MONETARY UPDATE – EVERYTHING’S UNDER CONTROL…SURE! – Believe that and I’ve got a bridge to sell you 🙂

Some economists, stock market strategists, and investment advisors have referred to the current economic situation is “goldilocks”, GDP growing modestly (sub 2%) but about to firm up, inflation under control (also sub 2%), the Fed continuing to “normalize” rates with the latest 25 basis point increase and another scheduled for December. Everything is even promising enough that the Fed is talking about beginning to pare down their $4 trillion balance sheet at the end of this year. (I can’t resist interjecting here that balance sheet reduction remains to be seen and the end of ’17 is a long way off.)

However…..while the financial world is relatively quiet, for the moment, the underlying problems have not gone away. The following chart provides us a simple picture of what Central Banks have “wrought” over the last 8-9 years.

While the US Fed has taken a break from money printing, their slack has been taken up by the ECB, BOJ, BofE, and SNB. Lots of economists have reflected that the appropriate money printing in ’08 saved the world from a financial collapse, and we can’t disprove that, but you can see that  $7-8 trillion has been printed subsequent to early ’09, and the curve now is steep as ever. Wouldn’t it be nice if all we had to do to create prosperity was rely on the Central Banks to provide the cash. We could all stop working, collect, and spend the cash. Unfortunately, goods and services have to be produced at competitive prices if an economy is to flourish. You would think that Central Bankers would understand this, but surgeons “cut” and Central Bankers “print”.  You would think that $11 trillion of new money since 2006 would have stimulated the US (and worldwide) economy rather substantially. That’s an incomprehensible amount of money. (Lebron James makes $40,000,000 per year. It would take him TWO HUNDRED SEVENTY FIVE THOUSAND YEARS to earn $11 trillion.) That’s true, but bringing the discussion back to earth, the result in this case is that US GDP growth has averaged 1.3% from 2007 until 2016, still sub 2% since ’10. It happens that the US economy grew at 1.3% during the US depression of 1930-1939, so I propose that what we have experienced, and are about to experience,  is not “goldilocks”. The Central Banks around the world have been essentially “pushing on a string”.

The same problems exist today that were in place ten years ago, but the numbers are a lot larger. We continue to believe that there is no graceful way to “normalize” the situation. We don’t blame Janet Yellen. She didn’t create this mess. It was the politicians, of both parties, over the last thirty to forty years. We believe that there will be no more than one more rate hike this year (right now an apparent 38% probability for December) but interest rates will still be very low historically, and “real” interest rates will still be negligible, if not negative. As far as reducing the Fed balance sheet, Janet Yellen discussed a modest pace of reduction. If this reduction starts at all, it will be a form of “tightening” that, along with the modest rate increases,  our still fragile economy will not easily withstand. We believe that the current series of interest rate increases, as well as the initiation of the Fed balance sheet reduction, will just be precursors to the next round of stimulus.

We believe that the price of gold, marking time lately, will resume its long term rise, as the next round of stimulus comes into view. This is, after all, what Central Bankers do.

 

Download PDF

SEMI-MONTHLY FISCAL/MONETARY REVIEW – QUIET MONTH OF MAY – THE BEAT GOES ON

Download PDF

SEMI-MONTHLY FISCAL/MONETARY REVIEW – QUIET MONTH OF MAY – THE BEAT GOES ON

The capital markets were once again relatively quiet, as was the price of gold bullion (down 0.1%) for the month). The gold mining stocks were mixed on the month, with the larger miners (represented by GDX, up 1.8% and the smaller miners, represented by GDXJ down 2.5%. It appears that the re-balancing of GDXJ, which we described last month, and has affected the pricing of some of the small to medium sized miners has largely run its course, so the miners should begin to act a bit more rationally.  Our gold related holdings have not changed, but we have found some restaurant/retail companies that we believe offer opportunity to “augment” our returns.

The most significant fiscal/monetary developments over the last month are as follows:

The federal budget debate continues, and is heating up in terms of resistance to the suggested spending cuts. Also, the debt ceiling has to be raised quickly because tax receipts are coming in more slowly than anticipated, and the government is already running on “temporary” spending measures.

While there is evidence of improvement in the economy, in particular the employment numbers (all of which are estimates, normally revised several times) there continues to be many signals that the recovery is anemic. Even the Fed said “the growth is modest………Consumer spending softened, with many districts reporting little or no change in non-auto retail sales”.

Related to the Fed’s observations, the most recent consumer surveys show a clearly weakening trend, which we postulate reflects frustration over POTUS’ difficulty in delivering on campaign promises.

Clearly, the unproductive “noise”, largely provided by our inexperienced and “unorthodox” Commander in Chief is undermining  policy initiatives. Policy paralysis, in large measure,  becomes the result, with executive orders implementing a more limited agenda. Unfortunately, time wasted is exacerbating, not helping, the fiscal/monetary distortions that are negatively affecting the worldwide economy.

Consumer debt is at new highs. The housing “bubble” of 2007 has been replaced by new highs in sub-prime auto debt, student loans, and “shadow bank” (internet) lending. We don’t believe interest rates will rise by much. Higher rates would choke off the already tepid consumer spending and wreck government budget balancing attempts.

We continue to feel that the 1.5-2.0% GDP growth (the weakest “recovery” after recession in at least 50 years) that has been a feature of our economy for almost ten years now is more likely to slow than accelerate. The sluggish growth has been in spite of close to zero percent interest rates and trillions of newly created dollars. It stands to reason that even modestly higher interest rates and an attempt to reduce the size of the Fed’s balance sheet will be a deterrent, not a stimulant, to faster growth. Further, we believe that the modest “tightening” direction will prove to be just a setup to the next phase of stimulation, as the economy stalls and politicians scream “do something”. At some point as that process plays out, we expect gold related investments to be the “cream rising to the top” of asset allocation.

Download PDF